I recently stumbled across an M&A readiness checklist put out by Canada’s export credit agency, Export Development Canada. If you have a client that isn’t an experienced buyer, I think this checklist is a great way to help their board and management assess what they need to do in order to prepare to implement an acquisition strategy. The checklist includes nine specific items, including the formation of an M&A team, the preparation of a corporate strategy that identifies target markets and entry strategies, including M&A, and the need to define the type of acquisition to be pursued and the specific criteria for acquisition targets. This excerpt addresses this last point:
Specific selection criteria and indicators for assessing potential acquisition targets are clearly defined.
Why it’s important: Specifying what you’re looking for will help you find suitable companies to buy or merge with, based on your industry and needs. Some things to consider include the target company’s:
– Size (number of employees and revenue)
– Location (country and/or region)
– Expertise, skills or operational capacity
– Production capacity (minimum and maximum) – Markets served (territory covered and distribution channels)
– Type of customers (B2B/B2C and customer profiles)
– Corporate governance (ownership structure, commitments to environmental, social and governance (ESG) standards and diversity and inclusion targets)
– Any additional selection criteria, for example, product or company certifications, complementary research and development, etc.
How to measure success: You have a defined profile of the ideal target company with the criteria you’re looking for. It should be regularly updated based on feedback and changing market conditions.
This Paul Weiss memo discusses a variety of factors that may cause activist strategies to evolve over the course of the coming year. This excerpt highlights how the abundance of dry powder at private equity firms may fuel activism – and corporate responses to activism – in 2025:
Private equity dry powder has continued to grow along with the pressure to deploy capital. Expectations of improvements to macroeconomic conditions (potentially including lower interest rates) may add further momentum to the rebound in deal activity seen during the second half of 2024. In anticipation of a return to more favorable market conditions, private equity funds are continuing to explore new opportunities for capital deployment. Minority, or white squires, investments allow private equity funds to opportunistically deploy a moderate amount of capital for an attractive rate of return at companies that have already been identified by activists as targets for operational or strategic change.
While private equity interest in activist targets is not new, such investment strategy may be particularly attractive under current market conditions. Minority stakes, particularly if accumulated through the use of derivatives, allow for a less risky and more flexible pathway to invest in companies that may be too large or too complex to be a suitable buyout target at this time.
Unlike many activist funds, private equity funds also have the operational skillset and a longer-term investment horizon to realize returns. With operational and strategic demands reaching an all-time high in 2024 and likely to persist until the private equity M&A market sees a more significant rebound, activists will continue creating opportunities for private equity firms to “piggy back” off their theses.
KKR’s recent investment in Henry Schein showcases the willingness of PE investors to play the role of a minority “white squire” investor in response to activist campaigns.
Other factors that the memo identifies as potentially shaping activist strategies this year include the return of hostile deals, secular trends fueling the demand for portfolio simplification, and the potential to target CEOs following operational and strategic missteps during a period of increasing uncertainty.
In In re: Shanda Games Limited Securities Litigation, (2d. Cir.; 2/25), the 2d Cir. reversed a district court’s ruling & allowed plaintiffs to proceed with securities law claims premised on allegedly false and misleading projections included in a merger proxy and on the target board’s statement that the merger was “fair” to the minority stockholders.
The litigation arose of out of a 2015 going private transaction involving Shanda Games, a China-based maker of online games incorporated in the Cayman Islands. The plaintiffs were former minority stockholders led by David Monk, and they alleged that certain directors and executive officers of the company made false and misleading statements and omissions in Shanda’s merger proxy in an effort to conceal that the deal price did not reflect the fair value of the company’s shares and thereby discourage the exercise of appraisal rights.
Among their other claims, the plaintiffs alleged that the projections included in the company’s merger proxy were materially misleading as was the board’s characterization of the merger as “fair” to the minority stockholders. The plaintiffs also claimed that the company’s failure to update the proxy statement to include disclosure concerning the performance of a key new product represented a material omission.
With respect to the projections included in the merger proxy, the plaintiffs focused on the manner in which projected amortization and depreciation expense were calculated in preparing the projections and contended that the proxy. They pointed out that manner in which those expense categories were determined differed from historical practice and violated accounting principles. The Court agreed:
At the start, Monk has adequately alleged that basic accounting principles were violated in the preparation of the March 2015 Projections. Prior to the Freeze-Out Merger, Shanda had estimated depreciation and amortization based on the estimated useful life of the assets. But as the Complaint alleges, for the March 2015 Projections, Shanda used a new method, one which “assumed that depreciation and amortization would grow at a rate that was a function of revenue growth” in violation “of basic accounting principles.” App’x 761, ¶ 169. This method resulted in the impossible outcome of the book value of Shanda’s capital assets becoming negative in 2018. App’x 761-62, ¶ 170.
To be sure, Shanda was permitted to choose any accepted accounting method while characterizing its process for preparing the Projections as reasonable. But it was limited to accepted methods. Cf. New Eng. Carp., 80 F.4th at 170 (“[A] plaintiff will be unable to establish that [a statement] is false merely by showing that other reasonable alternative views exist. Where those alternatives exist, the speaker making the statement (expressing an opinion) can choose among them ․” (emphasis added)). This is because a reasonable investor assured by Shanda that the Projections were reasonably prepared would infer that basic accounting principles were followed.
The plaintiffs also contended that statements to the effect that the disclosure contained in the proxy statement was a “summary of the financial projections provided by management” to the company’s financial advisor and the buyer group was misleading, because the projections presented in the proxy statement excluded a year of data that was part of the projections. The Court agreed, concluding that with one out of five years of data excluded, the projections in the proxy statement did do not constitute an accurate summary of the material provided to the financial advisor and the buyer group.
The plaintiffs further challenged the statements in the proxy that the transaction was fair to the minority stockholders. In that regard, they noted that the defendants were aware that the company’s key new product was performing significantly better than projected and that this resulted in the company being significantly more valuable than the valuation reflected in the deal price. As a result, they alleged that the defendants knew that this statement of opinion was false. The Court agreed:
We also conclude that Monk has adequately alleged that by the time of the Final Proxy the Defendants did not believe that the Merger was fair and that describing the Merger as fair did not align with the information in Shanda’s possession. At that point, MIIM had launched and the game’s initial success was such that the Defendants “could not possibly have believed the Buyout was fair.” . . . Shanda was able to track in-game purchases, the source of revenue for MIIM, in real time and management reviewed the data at least weekly. It is reasonable to infer that Defendants therefore would have known about MIIM’s success because MIIM generated over $90 million each month between its launch in August and the issuance of the Final Proxy in October. Monk thus plausibly alleges that Shanda knew that the fairness opinion was based on assumptions that had proven incorrect, yet Shanda continued to state that the Merger was fair. Accordingly, Monk has adequately pleaded that these statements are actionable.
However, the Court rejected the plaintiffs’ claims that the failure to update the proxy materials to include information on the new product’s performance did not represent a material omission, because under Cayman law, there was no duty to disclose that information.
This FTI Consulting article discusses ways that PE firms can use AI to drive value for their portfolio companies. This excerpt addresses how PE firms’ efforts to implement their own AI initiatives can pay dividends when they’re engaging in buy-side due diligence:
On the buy-side, PE firms that have a higher level of AI maturity, either in one of their PortCos or, ideally, have moved from “Decentralized” to “Centralized” AI operating models, will be better positioned to evaluate potential targets. Their own AI use case formation and development and performance in AI initiatives will help them better evaluate the AI readiness or impact of a potential target company.
These PE firms will, simply put, see the AI potential in targets more clearly. For example, a PE firm we worked with evaluated an MSP target with a low AI maturity and identified a potential 10% EBIDTA increase if AI tools were applied. In another case, a PE firm identified a target that had invested in building a data platform that can be readily used as a platform play for enabling AI use cases across this firm’s other portfolio assets and made this factor the cornerstone of their investment theses.
The article also points out that portfolio companies that have already implemented AI based on well-defined use cases and shown evidence of value creation may benefit from an “AI multiplier” when negotiating the price in a sell-side transaction.
The Delaware courts continue to slog their way through a stream of lawsuits in which plaintiffs seek to have the entire fairness standard applied to an M&A transaction by claiming that a substantial minority stockholder should be regarded as a conflicted controller. Late last month, in Turnbull and Acosta v. Klein, et. al., (Del. Ch.; 1/25), the Chancery Court was confronted with another lawsuit in which these claims were front and center, but the Court’s newest member, Vice Chancellor Bonnie David, shot them down.
The case arose out of the sale of U.S. Well Services to ProFrac Holding Corp. in an all-stock merger. The plaintiffs challenged the merger as unfair and brought breach of fiduciary duty claims against the board and its largest stockholder, private equity firm Crestview Advisors. Crestview owned approximately 25% of USWS’s stock outright and 40% on a fully converted basis. The plaintiffs alleged that Crestview controlled USWS and negotiated unique benefits for itself in the merger, and that the transaction should be evaluated under the entire fairness standard.
In addition to Crestview’s ownership stake, the plaintiffs pointed to its contractual right to designate two of USWS’s nine directors and the influence it could have conceivably wielded over them. They also contended that Crestview, along with certain other investors, comprised a control group. Vice Chancellor David concluded that those allegations were insufficient to support the argument that Crestview exercised either general or transactional control over the company, and that the plaintiffs’ allegations of the existence of a control group were also lacking.
Citing Delaware precedent, she held that Crestview’s ownership position, director designation rights, and allegations of its influence over one director weren’t enough to support an inference that it exercised general control over the Board. That meant the plaintiffs had to establish that Crestview exercised control over the merger transaction, and the Vice Chancellor concluded they came up short there as well.
The plaintiffs asserted three arguments in support of their theory of transactional control. First, they pointed to disclosures in the merger proxy indicating that the buyer had initially reached out to Crestview concerning the possibility of a sale. They contended that this demonstrated that the buyer recognized that Crestview was calling the shots on a potential deal. Vice Chancellor David disagreed, noting that the focus is not on the buyer’s perceptions, but on the alleged controller, and whether it effectively controls the board so that it also controls disposition of the unaffiliated stockholders’ shares.
The plaintiffs then pointed to USWS’s decision to appoint a special committee as indicating that its management, board and the buyer all recognized that Crestview was a controlling stockholder. The Vice Chancellor didn’t buy that one either:
Forming a special committee serves as “evidence of sound corporate governance[,]” not control—and it limits a stockholder’s ability to exercise transaction-specific control. Rouse Props., 2018 WL 1226015, at *19. “[T]o hold otherwise might discourage fiduciaries from employing these important measures for fear they might unwittingly signal that they perceive a minority blockholder with whom they are dealing to be a controller.”
Finally, the plaintiffs pointed to the fact that Crestview attended five board meetings at which the transaction was discussed, and argued that its attendance gave Crestview the ability to tank the deal if it didn’t like it. Unfortunately for the plaintiffs, attendance was all that they alleged, and that wasn’t enough to support an inference of control.
The plaintiffs threw together a bunch of allegations in support of their theory that Crestview and other investors constituted a control group. Perhaps the most interesting of these allegations was that the by cooperating with each other to prioritize their interests, the alleged members of the control group engaged in “transaction-specific coordination.” None of the plaintiffs’ theories got much traction with the Vice Chancellor, and here’s what she had to say about this one:
Plaintiffs argue that the Amended Complaint adequately alleges “transaction-specific coordination” in which the alleged control group memberscooperated with one another to prioritize their collective interests in the Merger itself. . . Plaintiffs allege that ProFrac asked for Crestview’s support in early merger discussions, and ultimately negotiated a deal that uniquely benefitted Crestview, TCW, the Wilks Brothers, and Matlin. . . But again, the Amended Complaint does not allege any agreement among the members of the supposed control group with respect to the Merger. Plaintiffs simply conflate consensus among the parties in approving the Merger with the act of forming a group. See Silverberg, 2019 WL 4566909, at *6–7 (distinguishing an act of consensus from the formation of a group).
In a brief, one-page order this week in In re Anaplan, Inc. Stockholders Litigation (Del.; 2/25), the Delaware Supreme Court affirmed the Chancery Court’s June 2024 approval of a motion to dismiss breach of fiduciary duty claims arising out of a $400 million reduction in the purchase price to be paid to target stockholders as a result of post-signing equity awards to insiders that allegedly violated the terms of the merger agreement. In In re Anaplan, Inc. Stockholders Litigation, (Del. Ch.; 6/24), Vice Chancellor Cook had held that because the transaction was approved by a fully informed and uncoerced vote of the target’s stockholders, it was subject to business judgment review under Corwin.
As John had shared at the time of the Chancery Court decision, the key takeaway may just be that if you want to make a quick exit from a lawsuit based on Corwin cleansing, your best bet is to lay the whole situation out in your proxy disclosure without sugar coating it. Vice Chancellor Cook had also rejected the plaintiffs’ arguments of “situational coercion” and “structional coercion” — i.e., claiming the status quo was so unpalatable that stockholders had no alternative but to vote for the deal at the reduced price doesn’t alone support a finding that the vote was coerced and insufficient for Corwin.
Earlier this week in Krevlin v. Ares Corporate Opportunities Fund (Del. Ch.; 2/24), Chancellor McCormick addressed a shareholder challenge to the April 2019 acquisition of Smart & Final Stores by Apollo on the basis that Smart & Final’s former controller-sponsor, Ares’s “need for liquidity caused it to favor a deal, even at a suboptimal price, over no deal at all” – rendering the merger a conflicted-controller transaction. If this sounds familiar, it’s because VC Glasscock just addressed this issue about a month ago in a post-trial memorandum opinion, Manti Holdings v. The Carlyle Group (Del. Ch.; 1/25) — although Chancellor McCormick’s decision this week was at the motion to dismiss stage.
Like in Manti Holdings, Chancellor McCormick notes that “Delaware courts are particularly chary to infer liquidity-based conflicts arising from the lifecycle of a private equity fund.” In a short three pages of the opinion, she addresses the plaintiff’s liquidity-driven conflict theory, concluding that “the fact that Fund III and Fund IV were in ‘harvest mode’” and “generally not seeking to deploy capital into new investment opportunities” was insufficient, on its own, to render Ares conflicted.
These two decisions in rapid succession may somewhat assuage concerns that the Chancery Court had been taking a nuanced approach to evaluating claims that a controlling stockholder received a “special benefit” in transactions where all stockholders were entitled to receive the same consideration — after prior decisions cited unique liquidity needs, avoiding financial losses arising out of its investment structure or realizing intangible benefits like consolidation of control over the company. This Milbank General Counsel blog on last month’s Manti Holdings decision says, “private equity firms and other controllers should note the Court’s focus on alignment of interests and sales process integrity” and notes that “decision-making processes should be well documented, and potential conflicts of interest should be addressed to minimize litigation risk.”
Almost a year ago, the Delaware Chancery Court issued its decision in Palkon v. Maffei (Del. Ch.; 2/24) — denying a motion to dismiss a lawsuit against TripAdvisor’s board and controlling stockholder. The lawsuit challenged the board’s decision to reincorporate from Delaware to Nevada. The Court applied the entire fairness standard since TripAdvisor was a controlled company — and, since the purpose of the reincorporation was to reduce litigation risk to the company’s fiduciaries (and consequently also the litigation rights of the minority stockholders), the incorporation provided a non-ratable benefit to the controller.
You may remember that the Delaware Supreme Court granted an interlocutory appeal of this decision in April, previewing a potential reversal. That decision came out yesterday. In Palkon v. Maffei (Del.; 2/25), the Delaware Supreme Court reversed the Chancery decision and applied the business judgment rule. The Court was persuaded by the defendants’ arguments differentiating “existing potential liability” for the fiduciaries and “future potential liability” for the fiduciaries. If there was another pending or contemplated lawsuit (i.e., existing potential liability), that would weigh “heavily in determining materiality” of a non-ratable benefit to the controller.
We recognize that providing protection to directors against future liability exposure does not automatically convey a non-ratable benefit. Were this the case, no board could use company funds to procure a Side A policy or adopt a Section 102(b)(7) exculpation provision without triggering entire fairness review. Yet Delaware courts have declined to find that directors lack independence or disinterestedness because they adopted a Section 102(b)(7) provision, even though such provisions reduce a director’s future liability exposure. Our courts have also held that the receipt of indemnification benefits does not necessarily taint a director’s judgment with self-interest. Finally, boards almost universally procure D&O policies, which reduce the risk of director liability exposure in future litigation.
After reviewing relevant Delaware case law, Justice Valihura, writing for the Court, states, “Taken together, these cases suggest that the hypothetical and contingent impact of Nevada law on unspecified corporate actions that may or may not occur in the future is too speculative to constitute a material, non-ratable benefit triggering entire fairness review. Given that Plaintiffs have not alleged any past conduct that would lead to litigation, this case aligns with our case law that applies the business judgment rule.”
I’m sure much ink will be spilled over this decision in the coming days and weeks. We’ll post memos in our “Controlling Shareholders” Practice Area.
The Treasury Department’s new outbound investment screening program — which requires notifications for or prohibits certain U.S. investments in Chinese companies — went into effect on January 2. When the rule was finalized, Treasury issued this “Additional Information and FAQs” document. This Gibson Dunn alert describes the Treasury Department’s subsequent guidance that tries to provide additional clarification on the scope of the rules — the latest of which was posted on January 17.
The Program website provides the following information and features about the Rules:
– Treasury published over 40 FAQs, described further below.
– In addition to the FAQs, Treasury provided further detail on the process for requesting a national interest exemption—an exemption from the Rules for transactions that the U.S. government determines are in the national interest. Treasury notes that these exemptions, which will be determined by the Secretary of the Treasury in consultation with the Secretaries of Commerce and State and heads of other relevant agencies, will be made “only in exceptional circumstances,” and will be assessed based on the totality of relevant facts and circumstances.
– Treasury launched the Outbound Notification System portal for reportable transactions, which functions very similarly to the portal used by the Committee on Foreign Investment in the United States (CFIUS). Templates for each type of notification are available on the Treasury website here.
– Treasury provides several ways to contact the Office of Investment Security, including to ask questions about the Rules, report a transaction, or request a national interest exemption.
The memo then lists a number of compliance steps and considerations for U.S. person investors, noting that, while it’s been effective for only a few weeks, the program has already caused compliance challenges for companies and financial institutions that are struggling through making appropriate changes to their policies, procedures, and agreements.
If you’re wondering what the fate of these rules may be, the memo has this to say about what the change in Administration means for the future of outbound investment screening:
On January 20, 2025, President Trump issued an order for a “Regulatory Freeze Pending Review.” While this order directed agencies to consider postponing the effective date for any rules that have been issued which have not taken effect, it will not impact the Program, which was already effective prior to President Trump taking office.
However, the “America First Trade Policy“ memorandum calls for a review of Executive Order 14105, which provided the basis for the Program and the Rules, and may impact the Program. The Memorandum directs Treasury to assess whether the current controls in the Program are sufficient to address national security interests and make recommendations for any further modification by April 1, 2025. Some members of Congress have also called for additional or stronger restrictions on outbound flows of U.S. capital to China in sensitive industries . . .
While it is difficult to anticipate future actions by the new Trump Administration, there has been a steady consensus from the first Trump Administration through the Biden Administration – and with AI developments increasingly top of mind for national security and technological competitiveness reasons – there is a reasonable chance that the Program becomes more muscular after April 2025 following the aforementioned regulatory review.
Two days after the Wall Street Journal reported that Paramount Global was in exclusive discussions with Skydance regarding its potential acquisition of Paramount’s controlling stockholder, National Amusements (NAI), or NAI’s controlling stake in Paramount rather than a transaction with Paramount itself, the Employees’ Retirement System of Rhode Island, a Paramount stockholder, served the company with a books and records demand. The demand sought the production of materials related to a transaction involving NAI, Paramount, or its assets, any board committee evaluating any such transaction, and any change-in-control agreements with company management — including emails and texts.
The company rejected the demand, arguing that it lacked a proper purpose — as it hadn’t identified “a theoretically viable form of wrongdoing” — and failed to identify sufficient evidence to support a credible basis to suspect wrongdoing. Litigation ensued. The Delaware Chancery Court posted its opinion last week in State of Rhode Island Office of the General Treasurer v. Paramount Global (Del. Ch.; 1/25).
Citing the demand’s reference to “usurping Paramount’s corporate opportunities,” Paramount argued that whenever a controlling stockholder could veto a potential transaction, there’s no “corporate opportunity” that the controlling stockholder could usurp. Vice Chancellor Laster notes this is a “valid point” but that the demand does not need to articulate a specific legal theory. He found that Paramount sought to “put the cart before the horse” by insisting that the demand articulate a conceptually viable legal theory — a demand must “explain why the stockholder has a credible basis to suspect wrongdoing,” and a controlling stockholder “steering bidders away from a company-level transaction and toward a parent-level transaction” can involve breaches of the duty of loyalty.
With respect to the stockholder’s evidentiary burden, the opinion notes that it must only show that there is a credible basis from which the court can infer a possibility of wrongdoing by a preponderance of the evidence — not to prove that wrongdoing or mismanagement is actually occurring or that wrongdoing is probable.
Paramount argued that the stockholder impermissibly relied on post-demand events to support proper purpose — specifically, the WSJ’s continued reporting on transaction-related developments. While the opinion says, “this decision need not establish rules for all cases,” it allows the plaintiff to rely on post-demand evidence about pre- and post-demand events — noting that the stockholder promptly raised post-demand developments during the litigation and that it would be wasteful to exclude the evidence and require a new demand be served.
VC Laster also disagreed with Paramount’s argument that news articles referenced by plaintiffs were not reliable enough to constitute evidence of the stockholder’s credible basis to suspect wrongdoing — noting that plaintiffs may rely on circumstantial evidence or hearsay for this purpose.
VC Laster found that the stockholder is entitled to the necessary books and records and remanded to the magistrate judge to address the scope of production.